Rich content + poor creators doesn’t add up

This week’s ruling against Apple for collusion with publishers to fix e-book prices is a shot across the bows for anyone hoping to make money on content business models of the near future. The case was pretty solid in that Apple left an e-mail trail proving it had in fact colluded, and the judge figured that consumers would end up paying higher prices. All true.

What’s missing, however, is any understanding of the convoluted logic of pricing economics in a pure content universe. Classical microeconomic theory says markets set prices at the point where marginal cost and marginal revenue intersect – the foundational principle of supply/demand mechanics. It works because the supply curve is upward sloping, reflecting the assumption of increasing marginal costs.

This is fair enough for manufactured physical products, but not for pure information products that have no material existence. In cases like e-books, which are “made” and “shipped” digitally, the marginal cost is essentially zero. Micro-theory would predict that such a market clears where the curves intersect – at zero.

Free information sounds great to the customer, so long as it is available. To the producer, however, “free” is hardly the incentive needed to foster a vibrant creative market. My wife is a writer and faculty member at a non-profit Boston-based group called Grub Street. This group offers courses and professional support for writers of all types. It is non-profit because the profession as a whole is hopelessly stuck in a money losing gear.

Traditional publishing is an almost laughably archaic business model based on the now dead principle that control of physical book production and distribution conferred upon these businesses the right and responsibility to vet and select work worthy of putting on bookstore shelves. Electronic production and distribution of literature is incomparably easy and cheap, and with the likes of Amazon driving down prices.

This dynamic is gutting the writing profession, squeezed as it is between dying traditional publishers and a new electronic value chain predisposed to pay ever declining prices for work.

App store lesson: pay the piper

A quote from one of Steve Jobs’s e-mails was offered in several press accounts of the court verdict as a sort of smoking gun, proving Apple’s guilt. His evil intent apparently included a desire to “create a real mainstream e-books market at $12.99 and $14.99” – in response to Amazon’s neat sounding $9.99 price point. In Jobs’s vision the consumer pays more, but at least the marketplace has some liquidity. Amazon may be the master of getting it to you cheaply, but Apple is all about creating new value.

This concept mirrors a lesson Apple took from its early iPhone experience in which an open App Store offered more and better apps to consumers than a closed model based on “web apps”. The result was a bigger market with more choice and money to be made.

Five years after opening, the App Store has over 900,000 apps available with 50 billion downloads to date. Without an incentive to create the content, producers won’t produce. Without the content, iPhones and iPads are really just overpriced gadgets.

Information value in the supply chain

The lesson for strategists preparing to use digital supply chains to build value into their products – an increasingly important reality not only for electronics makers, but also those producing vehicles, appliances, capital equipment and more – is not just that apps matter, but that app creators need to be paid for their work.

This applies to people writing apps for energy efficiency intended to run on Johnson Controls’ Panoptix platforms or navigation apps for Ford’s cars or utilisation apps for Caterpillar equipment. The internet of things is coming and we had better set the precedent that pure content creators can make a living serving it or we’ll end up connected with nothing to share.

Some might think of it as an ecosystem of applied ideas surrounding the physical delivery mechanism of a device. Could it enhance the value of medical equipment? Yes. How about manufacturing machinery? Certainly. What about sporting goods? Look around you and find someone with a Nike Fuel Band – chances are they’re busily competing with friends to see who took more steps in the past week. Why not also things like custom-blended recipes for speciality shampoo or make-up?

Creative minds are out there ready to add value to your products. Make sure they have an incentive to do so.

Kevin O’Marah
Chief Content Officer
SCM World

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